A little bit about whats going on in the world of International Trade Law.

It’s all about the money: WTO and House of Cards

After binge watching Netflix’s original series, House of Cards, I couldn’t help going back and finding exactly how much of it (in terms of US-China relations) is accurate. Though it has several slight references to “rare earth minerals”(find out what that’s about here), the focus of the depicted trade war are negotiations revolving around a WTO case regarding China’s undervalued currency. Piekos and Tobias sum up the plot:

“The United States is in formal negotiations with China over its undervalued currency; at the same time, the United States has a suit against the Chinese at the World Trade Organization (WTO) to force China’s currency to float against the dollar. After official talks fall apart, the two sides continue to “back-channel” through Underwood and a Chinese billionaire, Xander Feng. Feng (pronounced “fung,” not “fang” as most of the show’s characters pronounce it) tells the United States that some members of China’s highest decision-making body, the Politburo Standing Committee, do in fact want a free-floating currency, but it must appear as if the United States is forcing China’s hand. He asks the United States not to drop the WTO suit despite China’s public protestations.”

Though the show’s portrayal of the dispute mirrors reality, it is quite outdated. The Bush administration was responsible for handling the issue during his time in the White House and since 2005, the Yuan’s value has increased by 33 percent. Some trade musings follow:

Now, currency manipulation may be a dead and gone issue now, but that doesn’t necessarily imply that it’s been completely eradicated. CM is basically a form of unfair trade where a sovereign nation decides to deliberately undervalue its currency (it’s also called “competitive devaluation”)in order to get a benefit in international trade. Essentially, it is seen as a combination of an import tariff and an export subsidy.The effect is immense and immediate.

When the Yuan was devalued on orders from the Chinese administration, it allowed cheaper, Chinese goods to flood international markets since the foreign currency is automatically stronger. This allowed China to maintain a huge trade surplus, while the US constantly complained about the negative effects on its economy. The problem was enlarged due to the fact that the post-depression growth was intended to be growth-led and currency valuations only hampered the process. It is undoubtedly true that China is not the sole nation to have undertaken such a trade-protectionist measure, but since it is the second largest trader in the world, the ramifications of its actions are quite severe.

Though there is no direct WTO case on this subject as of now, we cannot discount the possibility of the same. The basic question to tackle here is how (if at all) the dispute settlement mechanism of the organization can take cognizance of the matter. And that eventually boils down to an examination of the relationship existing between currency exchange and international trade.
When the matter first came to the attention of academicians, Joel P. Trachtmen argued that any claim against China at the WTO-forum would not only face innumerable hurdles, but would also be unsuccessful in applying any pressure on the South-Asian nation. [Remember that Article 3.7 of the DSU obliged members to exercise judgement as to whether the action under the procedures provided would be fruitful at all.]

To assist in the understanding of the issue, Professor Trachtmen recognizes three grounds under WTO law for targeting the exchange-rate policy of China:

1) Article XV, GATT: Sub-section (4) of the provision provides that members cannot use their exchange action to “frustrate the intention of this Agreement..”. However, there have not been any WTO dispute settlement decisions under this provision, and so there are no precedents to guide us in interpreting its key terms.

2) SCM Agreement: It could be possible to argue that the regime constitutes a prohibited export subsidy or import substitution under Article 3 of the Agreement or simply argue that the subsidy causes adverse effects under Article 5 of the same.

3) Non-violation complain: Even if the Chinese currency regime is not a violation of WTO law, it can be argued that it“nullifies or impairs” a benefit accruing to another party to the WTO treaty.